Overhaul Debate Centers On Bank Risk-Taking

As the battle over financial industry rules nears its final phase, lawmakers will be focusing on how much risk banks should be allowed to take. The measure is heading to a House-Senate conference, where banks are trying to kill a rule that would prohibit them from trading for their own profit.

Next week, Congress will begin hammering out a final compromise in its effort to overhaul the rules for regulating Wall Street and protecting consumers. President Obama is expected to have a bill to sign before Independence Day. Even in the final stages of the process, industry and consumer advocates are jockeying hard to shape the bill to their liking.

After the Senate passed its version of the financial overhaul bill two weeks ago, some analysts suggested consumer forces had prevailed despite the hundreds of millions of dollars the banks spent trying to influence the outcome.

But the battle isn't over. It will continue during the next few weeks when a handful of lawmakers on the House-Senate conference committee make final decisions on the bill.

"There's [a] very narrow window of time," says Heather McGhee, the director of the Washington office of the consumer advocacy group Demos. "There's a very small group of members to influence, and it is sort of a Super Bowl of lobbying right now on the Hill."

Scott Talbott, senior vice president for government affairs at The Financial Services Roundtable, declined to discuss any details of the industry lobbying effort. He says his group supports most of the overhaul legislation. It only has problems with about 20 percent of what's in the Senate and House bills, he says.

"About half of the 20 percent is still on the table for discussion and, depending on which way the conferees go, could move the needle one way or the other," Talbott says.

A Ban On Proprietary Trading

One provision the big banks hope to defeat in conference committee is something called the Volcker rule, named after the former Federal Reserve chairman and current White House adviser, Paul Volcker. It would ban banks from what's called proprietary trading.

Banks would be able to trade in financial markets on behalf of their customers, but not for their own profit. They'd also be barred from owning equity funds or hedge funds. Talbott says the Volcker rule is counterproductive.

"Proprietary trading as well as investments in hedge funds and equity funds are a solid asset-management technique, and when done properly help the bank manage its own risk, as well as the risk for its clients," Talbott says.

The banks are arguing to House and Senate conferees that proprietary trading shouldn't be banned. Instead, banks say they should be required to hold more capital — bigger cushions against losses — for riskier investments.

'Devil-In-The-Details Stage'

"This is the devil-in-the-details stage, and it turns out the devil works for the lobbyists," says Simon Johnson, a former chief economist at the International Monetary Fund.

Johnson says there's still plenty of time to influence the bill. "This is where, if you're on the inside and you know the tactical details and you can sway key voices at key moments, you can still gut a large part of what is the meaningful part of this legislation," he says.

Johnson is author of 13 Bankers, a book that criticizes the risky behavior of the biggest banks that fueled the financial crisis. He supports measures like the Volcker rule. But he points out that Congress has left it to regulators to craft the details over the next two years. He says that means the Volcker rule will be gutted.

"When you want to kill something, the best way to kill it is not actually to have a big, all-out fight and vote it down on the Senate floor," Johnson says. "The best thing is to send it off somewhere for study with very vague terms of reference, and you can be sure that by the time it comes back it will have taken on board a lot more of the banks' preferences."

Economist Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation, acknowledges that bank lobbyists can have a big effect during the rule-making process.

"When you get into talking about the nitty-gritty details or the fine language of bills, this is where the lobbyists earn their money," Litan says.

But he doesn't blame the banks for trying to defeat the Volcker rule. He says banks are inherently risk-taking institutions. For example, every loan they make is a risk.

"I think the idea that we can significantly constrain their risk by enacting some version of the Volcker rule is close to fantasy," Litan says.

He says that over the next two years, as regulators work out the details of the Volcker rule, the current anti-bank anger will probably subside. Litan says that will allow more rationality and less emotion to be applied to the issue.